Two or three cities is fine in the early game if you do a couple of things.  

One, get your sov and maybe a hero unit some xp.  A quick thing to do early is use summons or spearmen to support your heroes.  Heroes get the most xp solo, that is with no other heroes in the group, other soldiers or monsters are fine.  The goal here is to have at least one stack that will be better than the multiple stacks the CPU will send at you.  Once you have taken down the CPU's first wave you can counter attack.

Two, move up the civ tree get prestige and food.  These two things together will keep your economy humming until you take some cities from the computer.  Also getting roads between cities is helpful for moving around and defending your resources.

The first thing I train in my first city is a pioneer with the scouting attribute, sometimes two.  You do want to find spots for your next city quickly.  If you get stuck in one city because of a bad starting spot with badass monsters all around you consider starting over on a new map.  Honestly, one city isn't the end of the world if you are playing on normal, but it probably won't go well if you are new to the game.

Outposts are great for resources, but you need to clear out the monsters as you put them down.  Its probably better to get a few cities first then grab resources with outposts.  

I've found tarth and pariden to be great in the early game.  Yithril is probably good early too, but I'm not sure about that as I haven't really played them.

Lastly, don't put to many CPU opponents on the map until you learn the game and the tech tree.  Give yourself time to grow.

Have fun.    

Thanks  - I restarted with tarth and things are getting better.